The Royal Bank of Scotland (RBS) presents a harmonic convergence of my heretofore good fortune with bank trust preferreds, my belief that sovereigns will protect companies that are identified with their nation and the concept of too big to fail. I am going to initiate a position in RBS trust preferreds.
In response to the world wide banking crisis in 2008-2009, the UK pumped several billion dollars into one its largest and most storied banks, RBS, which had made a series of bad investments including overpaying for ABN-AMRO. When the dust settled, the UK owned over 80% of RBS. In a jolt to investors, RBS was forced by the UK and the ECB to suspend dividend payments on certain trust preferreds ("may pays") but continued payments on others ("must pays").
With the improvement in the world economy, RBS is bouncing back. Both the must-pays and the may-pays have increased over 50% in value in 2010 and have spike recently. The mus -pays seem a no brainer, yielding over 7.5% and trading well below their $25 call price. More intriguing are the might-pays which have yet to resume dividend payments, and a third subset inherited from ABN-AMRO which are currently must-pays but will become might-pays in early 2011 at which time the dividends will be suspended. The might-pays trade at a substantial discount from the issue/call price of $25 and if and when they resume dividends will yield more than 9.5%. To me this is a question of when, not if. Recent activity indicates this will happen within the year. I may initiate a speculative play in these.
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